Nebraska’s unique public power system facing market pressure

With power supply contracts now under negotiation across the state, Nebraska’s public power system – the only one of its kind in the United States – is coming under scrutiny and pressure.

While Nebraska’s largest electric utility, the Nebraska Public Power District (NPPD), is nudging its 75 customer-utilities to make a 20-year commitment to public power, at least a few of them are looking elsewhere for a better deal – and finding it.

The Northeast Nebraska Public Power District, for one, has signed an agreement to begin in 2018 getting some of its electricity from the Big Rivers Electric Corporation, a Kentucky utility.

Compared to the NPPD price, “It will mean pretty consistently $1.2 to $1.5 million a year in savings for our ratepayers,” said Northeast’s general manager, Mark Shults. Averaged over Northeast’s 6,500 customers, that would amount to a roughly $200 annual savings per customer.

The shorter contract term – 10 years as opposed to the 20-year contracts NPPD is now urging its customers to sign – is another reason Shults said his board opted to buy its power elsewhere. Given the volatile energy marketplace, he said, it didn’t seem advisable to lock into a contract for 20 years. With the still-evolving Clean Power Plan looming, he said, there’s no telling how much more debt NPPD might have to incur in order to comply.

Other people active in Nebraska’s energy industry have been encouraging municipal utilities and rural electric associations to think carefully about the NPPD contracts and to explore their options in light of the changing energy landscape.

‘We’re looking for competition’

Since NPPD a few years ago told its customer-utilities that it wanted to terminate the existing contracts early and replace them with new 20-year agreements, utilities across the state now are in a position to take advantage of changing circumstances. A few players in Nebraska’s energy industry organized a symposium last week where they advised especially large industrial and commercial power customers in the state to consider a shift away from public power.

“The public-power model is very good, and should be competitive,” said Mike Matheson, one of the symposium’s speakers and an 18-year NPPD employee who left the district in May. “But unfortunately, it’s not. We’re looking for competition. Competition is always better than no competition. The industry has changed and we need to change with it for the benefit of the ratepayers.”

The change Matheson is referencing actually took place on March 1, 2014. That’s when the Southwest Power Pool, which manages the electric grid that serves a swath of the country from the Dakotas to northern Texas, opened its integrated market for power. It effectively means that all power generators within the SPP’s footprint offer their generation power for sale every day, and the power that costs the least to produce, sells first.

That means that energy retailers, like Nebraska’s muncipal and rural electric utilities, have a lot more providers to choose from – provided they’re not tied in to a contract with a supplier like NPPD.

And in its first 12 months of operation, according to the pool, it resulted in savings of $131 million within its territory.

Hidden costs?

John McClure, NPPD’s general counsel and vice president for governmental affairs, agreed that the wholesale price for power presently is very “soft.” However, he warned, electricity customers should bear in mind that prices in the SPP marketplace don’t reflect the entire cost of power, and are not comparable to the rate charged by public-power wholesalers like NPPD.

Power sold through the Southwest Power Pool represents only the cost of fuel and what’s known as variable operations and maintenance. Along with actual power, all utilities are required to provide capacity. That is the proven ability to meet a utility’s load, and it can constitute a significant portion of a utility’s total costs.

There are costs that likely could be avoided by going to the SPP marketplace, however, such as debt payments. Public power districts with a long history of investing in generation, transmission and distribution resources have bonds to pay off. A retail utility that obtains power elsewhere likely would avoid that expense, said Phil Pogge, one of the organizers of last week’s meeting.

An NPPD spokesman said that the utility has $1.7 billion in debt and charges $9 per megawatt hour for debt service.

Pogge, the president and co-founder of Aksamit Resource Management, a Nebraska company that sells power to municipal and rural electric utilities, is all in favor of comparing the price of publicly-provided power to the price of power purchased in the sort of competitive environment he is advocating. To that end, he would like NPPD and other public-power wholesalers in Nebraska to itemize their bills, especially those to their utility-company customers.

“The conversation in Nebraska needs more facts,” he said, “so people can see what on their bill is going up and what is staying the same, so there can be real conversations about the future of Nebraska’s energy policy and industry. There’s too much lore around energy in Nebraska.”

Public power districts have lots of costs remaining from decisions made years ago, costs that don’t burden operators like Pogge’s company. He questions, for example, why NPPD lists the capacity charge at $13 per kilowatt month (it varies slightly with the time of year) when, he claims, he can provide capacity for about $4 per kilowatt month

“How much of (the NPPD) bill is related to debt service? How much is overhead costs? How much is related to actually buying demand services? (Capacity) is trading at a substantial discount compared to what people see in their wholesale power bill.”

Other incentives

One of those costs that NPPD said it now is trying to recoup is contributions that have not been made to the employee retirement fund. To that end, NPPD has created a two-tiered pricing structure for its customer-utilities. Compared to customer-utilities that sign the new 20-year contracts, those utilities that choose instead to adhere to the existing contracts for the final five years will pay 3.8 percent more over that period than those utilities that sign the new contracts.

NPPD, feeling the pressure of a more competitive environment, is making other efforts to persuade its customers to stick around. McClure said the new contract allows customer-utilities to obtain up to 10 percent of their power from renewable sources.

Public power has a long and storied history in Nebraska. It was instituted to ensure that the wide-open spaces, where installation costs would be high, would be wired along with the more densely-populated cities and towns, Pogge said.

“As rural electrification was taking place, it did need to be socialized,” he said.

But the industry now operates in a different world, Matheson said, and the judgment that matters now is the one rendered by the marketplace.

“We are suggesting that (retail) public-power districts go out and bid and see where the market takes them,” he said. “Some districts may do alright, and some may not.

“It’s strictly competition.”

One thought on “Nebraska’s unique public power system facing market pressure

  1. Interesting article. When I hear the “competition” word as it relates to wholesale power I always wonder who is going to make an investment in future power plants if “debt” is bad. It will be interesting to watch the Clean Power Plan play out and plants close. Cheap power might become a relative term.